Even though their government continues to censor the internet, and lock up people who violate those rules.  USA Today reports that China now has more users on the internet than the United States.  They numbers report that 220 million Chinese used the internet in 2007, which surpassed the US number of 216 million users.  And now that China has surpassed the US in number of users, expect them to lap America in this category in the coming years.  As China’s population of 1.3 billion people dwards the USA’s 304 million people.  Currently only 17% of Chinese citizens are using the net, compared to 71% in the USA.

So ever since the news came out last week that Microsoft tendered a $44 billion offer to pay Yahoo, I’ve had the same thought rattling through my brain. Why?

I understand that Microsoft (MSFT) is running a distant fourth to Google in search share. And by “distant” I mean almost non-existent, because they’d need to grow 4x to catch Yahoo and 20x to catch Google. And buying Yahoo does suddenly get them to 25% of the search share of Google. But how do the big brains in Washington figure that a 10% boost in search share is worth $44 billion dollars? The answer is, it’s not worth that much.

This illustration, from ComScore, shows you just how behind MSFT is in search share.

MSFT could have taken 1/10th of that money (~ $4.4B) and focused it on improving their search results and marketing their search product better. That probably wouldn’t have gotten them a 10% increase, but it would have had a better ROI. Instead MSFT choose to go for the big splash and scoop up a slumping Yahoo stock. In offering to buy Yahoo for 62% more than the recent share price shows MSFT has little clue how to innovate.

After all MSFT has always been running second to Yahoo, Google & others on the internet. Because MSFT’s cash cow still is Microsoft Office. But the web has not been nearly as profitable. MSFT showed how desperate they were to change their stripes when they bought 1% of Facebook for a cool $240M. A deal which cannot be effectively evaluated until Mark Zuckerberg and Facebook decide when they want to IPO. But make no mistakes about it, paying that much for barely a toehold of the social networking giant was all about blocking out Google.

In addition to overpaying, this current Yahoo deal sets MSFT back another year in search because it’ll take at least that long to sort out the deal. And even when the deal is approved by federal regulators, then Yahoo & MSFT still have to play nice on who’s search they are going to keep, who’s paid ad product they want to use, etc, etc. They could be bogged down for years trying to merge these two technology titans. And what will Google do during that time, aside from continue to grab more market share of search results. Well they’ll surely find new and innovative things that consumers will care about. So they’ll flank MSFT on other areas, while MSFT is stuck trying to digest its big Yahoo meal. And just like the body being its most fragile after a big meal, due to extra blood going to the stomach to help digest. So will MSFT and Yahoo become even less innovative as they try to merge, as all of their creative juices are tied up in red tape.

Bad deal for Microsoft, because they overpaid for a struggling company.
Bad deal for Yahoo, because they are now part of the scenery at Microsoft.
Irrelevant deal for Google, even they whined (see below) because they’ll keep on trucking.
Good deal for AOL, who if spun off from TimeWarner instantly become the next big acquisition target.

Could a deal by Google for AOL be coming soon? Keep an eye on this one.

Related stuff:
* Andy Beal had a nice piece on Google playing the role of hypocrite with their statement on the deal.

* Could Yahoo & Google be planning an alliance to thwart Microsoft? So says the WashingtonPost.